VIX Retraces from 2012 High as S&P500 Finds Support below 1300

S&P500 Finds Support at Past High

Everybody knows that highs and points of resistance on the way up often become lows and points of support on the way down (and vice versa). We have just seen that on S&P500, which stopped its 3-week fall less than a point below its autumn 2011 (27 October) high. Yesterday was by far the strongest day in the last 3 weeks. Of course, only the next days and weeks will tell whether this support will hold or the losses will continue.

S&P500 Index, weekly bars, 2010-2012

S&P500 Historical Volatility Low

Although S&P500 lost about 120 points (almost 10%) in May so far, historical volatility remains low – annualized 21-day HV was 13.24% at Monday close. This nicely demonstrates the problem with historical volatility, as calculated as standard deviation of daily changes over a recent period: It only measures how much daily changes differ from each other, but doesn’t take the overall price direction into consideration. If you have very similar moves every day, you will see low HV, regardless of the average size of the moves. The current historical volatility of 13.24% seems very low in the context of recent market action and it is no wonder that implied volatility (measured by the VIX Index) is almost double.

S&P500 historical volatility

VIX Falls Back from 2012 Record

VIX finished last week at 25.10 – the first time above 25 in 2012. On Monday it lost more than 3 points to close at 22.01. It is very common to see implied volatility (or the VIX) at premium to realized (historical) volatility, but in these days the premium is higher than most other times, which is not that surprising, as discussed above.

VIX (CBOE Volatility Index), since start of 2012

VIX Futures Curve Almost Flat, Then Moved Lower

In line with the 2012 record on spot VIX, the futures curve became almost flat at the end of the last week and we saw the long end of the curve trade above 30. As spot VIX fell on Monday, the curve also moved lower and regained a bit of its upward slope. The front month (June 2012) closed at 24.25, that is below spot VIX close on the day before.

VIX futures curve